Thursday Options Recap

by: Frederic Ruffy


Stocks are broadly higher on earnings and as the rally resumed across Eurozone equity markets Thursday. Morgan Stanley (NYSE:MS) shares surged 12.1 percent and are leading a rally in the financials after the investment bank’s earnings topped Street estimates. AT&T (NYSE:T), Philip Morris (NYSE:MO) and Union Pacific (NYSE:UNP) are also up on profit news. A deal was also announced after Express Scripts announced plans to buy Medco Health Solutions (NYSE:MHS). Meanwhile, the euro has added another 1.1 percent against the buck and market averages across the Eurozone rose for a fourth day on signs EU policymakers might soon finalize aid plans for Greece. The domestic economic news was mixed. Weekly jobless claims for the period ended 7/16 increased by 10,000 to 418,000, which was 7,000 more than expected. The List of Leading Indicators edged up .3 percent in June and in-line with expectations. However, the Philly Fed manufacturing survey improved to 3.2 in July, from -7.7 the month before and better than economists had expected (0.0). The focus, however, is on earnings and Europe. Consequently, 29 Dow stocks are higher and the industrial average is up 161 points heading into the final half hour. Intel (NASDAQ:INTC) is down on earnings and the only loser within the Dow. Meanwhile, the tech-heavy NASDAQ added 21.2 points. CBOE Volatility index (.VIX) dipped 1.34 to 17.75. Bullish sentiment is building in options trading. 10.1 million calls and 7.4 million puts traded across the exchanges so far.

Bullish Flow

The top options trade so far today is in BofA (NYSE:BAC) after a 146,982-contract block of Jan 20 calls is bought at 2 pennies. It’s possibly closing. Shares have added 20 cents to $10.05 and the Jan 20 call on BAC is 99 percent OTM with open interest of 488,169.

Henry Schwartz notes for today: Genworth shares are down 16% to the $8 range after pre-announcing a loss and option volume is extremely heavy this morning, running 18x normal pace with calls outpacing puts 34K to 6K in the first 90mins of trading. Flow is directionally bullish, with a block of 10000 Aug 9 calls bought to open by a cust (firm sold) on the ISE for 12cents, and a number of sweep buyers in Aug and Sep 8 strike calls as well. Earnings had been expected for next week.

Bearish Flow

SM Energy (NYSE:SM) trades to new 52-week high of $80.81 today, but has since given back most of the gains and is up 41 cents to $78.88. Meanwhile, options volume in the Denver-based oil and gas company is running 11X the average daily after 13,000 calls and 380 puts traded in SM. Most of the volume is due to one "stupid" spread, in which the investor sold 5,000 Aug 90 calls at $1 and sold 5,000 Nov 90 calls at $2.70. Both legs look opening. A shareholder might have initiated these trades as part of an overwrite strategy. $90 calls on SM energy are currently 14.1 percent out-of-the-money. Shares have seen choppy market action in 2011, but have performed well lately and are up 28.3 percent from a month ago. Earnings will come into play on the afternoon of August 1.

Implied volatility Mover

Out of 3644 listed products, 2256 (62%) are trading with 30day at-the-money Implied Volatilities lower on the day. Among the most liquid products, the large ivol drops include FFIV (44.4% IV -16pts, post earnings), NOK (42.7% IV -15pts, post earnings), CA (26.9% IV -11 pts, post earnigns) and even TZOO (83.1% IV -11pts despite a selloff of 33%). Broad market benchmark SP500 index 30day ATM IV is at 14.7%, a decrease of -1.6 points as the index trades near $1346.35, up 1.50%.